Opinion

Felix Salmon

Why the NYSE doesn’t matter

Felix Salmon
Dec 20, 2012 14:55 UTC

It’s official: ICE, an Atlanta-based commodity derivatives exchange which few Americans have ever heard of, is buying the New York Stock Exchange, without much indication that it even cares about the New York Stock Exchange. (The real reason that ICE wants the company is Liffe, NYSE Euronext’s London-based financial derivatives subsidiary.) If all goes according to plan, ICE will happily jettison the Euronext half of NYSE Euronext.

To get an idea of the degree to which stock trading is a complete afterthought in this deal, look at yesterday’s big merger announcement that Getco is buying Knight. That deal is valued at $1.4 billion, or about 17% of the price being paid for NYSE Euronext. And in many ways the new Getco-Knight combination is going to be bigger and more important, when it comes to stock trading, than the NYSE Group.

To put it another way: we’re living in a world where stock traders have become stock exchanges (both Getco and Knight control massive “dark pools”), while stock exchanges have become derivatives exchanges where the equities business is basically a high-profile, low-profit branding exercise. The NYSE Group is now just going to be a subsidiary of ICE; in the official announcement, which talks about its “iconic trading floor”, you can almost hear ICE CEO Jeffrey Sprecher rolling his eyes and wondering why on earth he needs to hang on to what at this point is little more than a heavily-guarded tourist attraction. (The release also made sure to note that ICE’s own New York offices are going to be miles away, in midtown Manhattan.)

It’s actually a good thing that stock trading has become a low-margin, low-value business: that’s what’s meant to happen when you have lots of competition. Think of it as one of the few areas of the financial-services sector where capitalism works as advertised. Elsewhere, we still have enormous salaries and enormous margins, which is one reason that ICE and CME between them are going to have a market capitalization of well over $30 billion by the time this merger is done.

Exchange mergers, then aren’t actually boring at all: they’re an indication that the financial-services industry is desperately trying to protect the rents it can collect by means of consolidation. There are lots of stock exchanges, and none of them make much money. By contrast, there are relatively few derivatives exchanges, they tend not to compete directly with each other, they tend not to compete on price, and they’re wildly profitable.

That’s something worth remembering, next time you hear about “Wall Street pay”. Yes, people on Wall Street do make stratospheric sums of money. But they’re very unlikely to make those sums by trading stocks on the New York Stock Exchange: there are much greater riches to be found trading derivatives on exchanges in London or Atlanta or Chicago. Just ask Lloyd Blankfein. He started his Goldman Sachs career trading commodity derivatives at J Aron. And just as the derivatives exchanges now dwarf the stock exchanges, so do the derivatives superstars now control banks like Goldman.

COMMENT

My understanding is/was that ICE was originally a creation of the NY investment banks for the express purpose of combating the inroads into derivatives trading (their bread & butter) then being made by the CME.

Getco may be paying too much for Knight.

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Nasdaq’s clever stupid bid for NYSE

Felix Salmon
Apr 4, 2011 19:56 UTC

In the immortal words of David St Hubbins, it’s such a fine line between stupid and clever, and Nasdaq’s Robert Greifeld is walking that very line with his $11.3 billion bid, with ICE, for NYSE Euronext.

Why is the bid stupid? For one thing, it will be very hard to get past antitrust regulators. Even in a world where it looks as though AT&T is going to be allowed to buy T-Mobile USA, regulators are likely to look askance at a single exchange controlling substantially the entire market in US stock listings. And if Greifeld is denied his merger, the setback will be enormous. On top of that, as Antony Currie notes, the bid dilutes the Nasdaq’s current shareholders, and involves taking on a lot more debt to boot.

Aaron Elstein adds a few more reasons to the mix today. For one thing, there’s the touchy subject of the NYSE trading floor, which has stubbornly survived a series of CEOs philosophically inclined to abolish it. Greifeld seems to be doomed to be the latest name on that list: an electronic-trading enthusiast who’s lumbered with an enormous building on the corner of Wall and Broad for the sake of a huge trading floor he neither wants nor needs.

Greifeld’s also, of course, getting the commoditized, low-margin part of the NYSE Euronext business: the stock exchanges. The really profitable bit, the derivatives exchanges, is going to ICE. Here’s Elstein:

The stock exchange business, simply put, is lousy stuff these days. Profits have been squeezed for years, due to technological and competitive pressures, and the reason NYSE wanted to merge with Deutsche Börse in the first place was to turbo-boost its options-trading business.

And politically it’s far from clear that a Nasdaq takeover of NYSE is significantly better than a German takeover. Deutsche Börse promises $400 million in synergies, largely in Europe, while Nasdaq sees $610 million — and for “synergies”, here, read “layoffs”: Elstein thinks that a good 25% of the combined US employees of Nasdaq and NYSE could end up losing their jobs.

But in the final analysis, Greifeld had no choice here. Even a bad merger with the NYSE is better than being left out in the cold, a small, low-margin, marginalized exchange in a world of giants. His best-case outcome now is to become a large, low-margin utility — and that’s not a bad business to be in. Because the only thing dumber than overpaying for an acquisition is losing your relevance and market power altogether.

COMMENT

You need to US Equities exchanges from other businesses.

Maybe the former are truly becoming “large, low-margin utilities” but if you are going to be the leader in such, is it bad? As a hypothetical shareholder, why is this so obviously, unacceptably, worse than having the CEO undertake (your words) “bad mergers”. It’s not _me_ that gets invited to White House dinners after all – the glamor does not pay my retirement – so why do I care? US equity exchanges may or may not be an interesting business, a profitable business, but if things turn out well it’s clearly NASDAQ in the lead at this point. Why is it rational for a shareholder to ask NASDAQ to risk it all for (media?) prominence in other areas?

With respect to the “world of giants” claim: NYSE is dying in the equities business and it’s unclear how that could change. To fix NYSE would be to gut it from to bottom while somehow retaining – its only live equity-related asset – the brand equity and its consequent listings … but this would be hugely expensive. You comment around the status of the NYSE trading floor shows you have some recognition of this. And there are no other likely U.S. equity exchange giants beyond this zombie and NASDAQ. Yay, competition! :-)

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Duncan Niederauer’s English-German phrasebook

Felix Salmon
Feb 15, 2011 20:59 UTC

NYSE CEO Duncan Niederauer doesn’t speak German, despite the fact that he was a Grand Marshal in the 2008 German-American Steuben Parade of New York. So we at Reuters (with many thanks a certain very senior editor who shall remain nameless) thought we’d help him out with a few phrases which might come in handy:

English: Dick Grasso? Before my time, sorry.
German: Dick Grasso? Sorry, der war vor meiner Zeit.

English: Daimler-Chrysler? I don’t see any comparisons there.
German: Daimler Chrysler? Also den Vergleich kann ich wirklich nicht verstehen.

English: The New York Stock Exchange is the cradle of American capitalism. It is a national treasure.
German: Die New Yorker Börse ist die Wiege des amerikanischen Kapitalismus — ein nationales Heiligtum.

English: Just because we’re German doesn’t mean we’re intent on world domination.
German: Nur weil wir deutsch sind, heisst das noch lange nicht, dass wir die Welt dominieren wollen!

English: I, for one, welcome my new overlords.
German: Also ich, fuer meinen Teil, heisse meine neuen Chefs herzlich willkommen!

Further phrases are left as an exercise for the reader. A few to get you started: “This is a merger of equals, not a takeover”, “Chuck Schumer? He’s just a passing acquaintance”, “Flying commercial hurts productivity and is a major security risk”, “Greed, for lack of a better word, is good”, “Co-located algorithmic high-frequency traders are important liquidity providers and are fundamental to the efficient allocation of capital on modern electronic exchanges”.

COMMENT

NYSE Euronext & Deutsche Borse are already tied up in multiple ways. http://goo.gl/KpI5f

Also, Duncan Niederauer’s relationship map. http://goo.gl/aKj8f

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